Austerity
Government policies of cutting public spending and raising taxes to reduce a budget deficit.
What is Austerity?
Austerity refers to government policies that reduce budget deficits by cutting public spending, raising taxes, or both. Austerity is typically pursued when a country faces high national debt, pressure from bond markets (rising borrowing costs), or requirements from international lenders such as the IMF or EU. Proponents argue austerity restores fiscal credibility and sustainable growth by reducing debt burdens. Critics, particularly Keynesian economists, argue that austerity during recessions is counterproductive: reducing government spending contracts demand, worsens unemployment, slows growth, and can paradoxically increase debt-to-GDP ratios by shrinking the economy's denominator.
Example
Greece implemented severe austerity measures after 2010 as a condition of EU/IMF bailouts, cutting public wages, pensions, and services while raising taxes. Greek GDP fell approximately 25% between 2009 and 2016 — a contraction comparable to the US Great Depression — before the economy began recovering.
Source: IMF — Lessons from Greece